The one thing lenders seem to have the most trouble with at closing is estimating the borrower’s property taxes. They invariably get it wrong, and borrowers pay the price.
Not immediately, of course. Borrowers go along merrily in their first year of ownership, paying into their escrow accounts each month exactly what their lenders said they should. And then, BAM! They are told their tax accounts are short of funds, sometimes woefully so.
Sometimes they are required to send a check immediately to make up the difference. If their lenders are more magnanimous, borrowers will be allowed to make up the shortage over the next 12 months. But that amount is added to new, often markedly higher tax payments to avoid having a deficit in the future. And borrowers have no choice but to ante up. After all, not keeping up with your property taxes is grounds for foreclosure.
Why do tax estimates often miss the mark? Because there is no standard method. Lenders and closing agents make use of various resources, including websites, local real estate agents, and tax authorities.
Determining the proper amount is particularly difficult for out-of-state and internet lenders who are not always familiar with the local tax codes, says Brian Koss, executive vice president of Mortgage Network.
Now, there’s an automated solution. Property Tax Estimator, from California-based data company CoreLogic, can estimate taxes in two minutes, speeding up a process that often takes humans 10 or 20 times that long. And the program gets it right 99.5 percent of the time, says Kirk Randlett, a vice president at CoreLogic.
The power behind the software comes from CoreLogic’s extensive database on 148 million-plus real estate parcels countrywide, plus information from the company’s tax services business and a built-in calculator that predicts future values.
The program can also estimate the property taxes on new construction and in jurisdictions that have ceilings on annual tax increases on existing houses. Here, the accuracy rate for the tool runs from 60 to 90 percent, depending on the complexity of the state’s tax code, according to Randlett.
California is probably the state best known for limiting the levy on current owners with its Prop 13 rule. But Florida, with its Save Our Homes legislation, also has restrictions on assessment changes, as do Massachusetts, Maryland, Michigan, Texas and Oklahoma. In those states, owners are protected against significant run-ups in their property taxes. But when the home changes hands, the assessment can increase significantly. And humans frequently calculate the change incorrectly.
And then there are the numerous places that have more than one taxing authority. Take Homer, New York, for example: The town levies a property tax, as does the incorporated village and the school district.
Estimating the tax is also important for lenders, since nowadays, if they regularly miss the mark in the early stages of the lending process, they can be flagged and fined by federal regulators. Furthermore, an accurate estimate later in the process helps underwriters determine whether a would-be borrower can afford all the costs associated with the mortgage.
“The tax estimating process is critical to several stages of the mortgage cycle: disclosures, underwriting and servicing,” says Randlett, who calls property taxes “a hidden cost.”
Unfortunately, the Property Tax Estimator is a B2B product that’s not available to homebuyers directly. But it has just recently been integrated into Ellie Mae’s mortgage management program, and several major national lenders also are now using the software.
The bottom line is this: Ask your lender how the property tax was calculated. If it was done using the CoreLogic program, there’s a good chance it was on the money. If not, you should prepare for a jump in your monthly escrow -- maybe a big one -- in 12 months or so.